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The Risks of Assembling Consumer Information

In a case of first impression in its circuit, the Second Circuit held that a business may not be liable under the Fair Credit Reporting Act (FCRA) for publishing false information unless it specifically intended the report to be a “consumer report.” Kidd v. Thompson Reuters, —F.3d — (2019 WL 2292190, 5/30/19). It then held that  defendant Thompson Reuters established it did not have the requisite specific intent by showing that at each step in its processes it instructed its users and potential subscribers that its platform was not to be used for FCRA purposes, such as employment eligibility–but only for the non-FCRA purposes of law enforcement, fraud prevention and identity verification–and required them to affirm their understanding of that restriction. Accordingly, the Second Circuit Court of Appeals affirmed the granting of summary judgment to Thompson Reuters, even though its subscriber had used its inaccurate report to determine a job applicant’s employment eligibility.

The take-away: If your business regularly assembles consumer information, distributes it to third parties, and fears it may be used for a FCRA-related end that is not intended, your business should forbid such uses in its subscriber contract, monitor the actual uses of that information, and take adequate measures to stop FCRA-related uses when it learns of them.  

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Borrower’s Death Does NOT Automatically Accelerate a Reverse Mortgage

Does the death of the borrower automatically accelerate a reverse mortgage? In a decision that is good news for reverse mortgage lenders, a recent New York appellate court answered no. In Mortgage Solutions v. Fattizzo, _ AD3d_, (2d Dep’t, May 1, 2019), the New York Supreme Court, Appellate Division, Second Department, considered whether the statute of limitations for enforcing reverse mortgage loans begins to run upon the death of the borrower. Defendant contended that the foreclosure action, filed August 6, 2014, was time-barred by the six year New York Statute of Limitations because the cause of action accrued on the date the borrower died, February 19, 2008.

The Court focused on the language in the reverse mortgage at issue – “[l]ender may require immediate payment in full of all outstanding principal and accrued interest if …” (emphasis added) – and noted that it confers upon the holder of the note and mortgage the option, but not the obligation, to accelerate payment of the debt. The Court held that an affirmative act by the lender was needed to accelerate the debt.

Accordingly, in New York, absent different language in the mortgage, the death of the borrower does not automatically amount to accrual of a cause of action for purposes of the statute of limitations. This is a departure from prior New York case law, although the same conclusion recently reached under Florida law.

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RESPA is a Shield, Not a Sword

RESPA is a Shield, Not a Sword

April 29, 2019

Authored by: Jim Goldberg

In a case of first impression, the Fifth Circuit held that a defendant is not required to plead as an affirmative defense under the Real Estate Settlement Procedures Act that it had complied with Section 1024.41 of the Code of Federal Regulations by responding properly to a borrower’s loss mitigation application. Germain v. US Bank National Association, — F. 3d — (2019 WL 146705, April 3, 2019). It affirmed the dismissal of the borrower’s RESPA claim on a summary judgment motion, based on the following facts.

Image by Nadine Doerlé from Pixabay

After repeated defaults beginning in 2009, the borrower Plaintiff filed three or four loss mitigation applications, asking for loan modifications in 2012, 2013 and 2014, in addition to filing bankruptcy in 2013. Each time, the loan servicer responded to the application properly. When the lender accelerated the loan and scheduled it for foreclosure in 2015, Plaintiff filed a lawsuit. It alleged the Defendants violated RESPA by failing to comply with Section 1024.41(d). That regulation section requires that a servicer who denies a loss mitigation application must notify the applicant of the reason he was denied any trial or permanent loan application option available pursuant to the regulation.

In their Answer to the complaint, the Defendants denied the allegation that they had failed to comply with Section 1024.41(d). The unstated basis for the Answer’s denial was that the loan servicer had complied Section 1024.41(i), which states: “A servicer is only required to comply with the requirements of this section for a single complete loss mitigation application for a borrower’s mortgage loan account.” The Court of Appeals ruled that the denial, without the detail, was sufficient, and affirmed the district court’s determination that the Defendants were not required to plead Section 1024.41(i) as an affirmative defense.

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Loan Servicers’ Obligation to Maintain Appropriate Database Systems

The background to the Eleventh Circuit’s decision in Marchisio v. Carrington Mortgage Services, LLC, — F. 3d — (11th Cir. March 25, 2019)(2019 WL 1320522) demonstrated repeated recklessness by a lender in updating its reporting databases after repeated litigation and settlements.

Image by pixel2013 from Pixabay.

The borrowers defaulted on their home loans in 2008; the loan servicer brought a foreclosure action; in 2009, the parties settled with a deed in lieu of foreclosure that extinguished first and second loans and required the loan servicer to report to the credit reporting agencies that nothing more was due on the loans. The loan servicer failed to correct the credit reporting and continued to try to collect on the nonexistent debt, prompting the borrowers/Plaintiffs in 2012 to file a lawsuit under the Fair Credit Reporting Act. The parties settled the FCRA suit in 2013, with the loan servicer/Defendant agreeing to correct the credit reporting. The loan servicer failed to timely comply with this correction requirement within 90 days and issued three erroneous reports that the second loan was delinquent.

The Plaintiffs then disputed with the credit reporting agencies the reporting of a balloon payment due on the second loan. In response, the loan servicer investigated the dispute. However, because the loan servicer had not updated its database to reflect the settlements, it erroneously verified to the credit reporting agencies that the Plaintiffs were delinquent, and then in 2014 charged them for lender-placed insurance on the property, which the Plaintiffs no longer owned. This led in 2014 to the second lawsuit with the FCRA claim that the 11th Circuit addressed. This lawsuit “caught Defendant’s attention” and immediately prompted it to update its database, correct its previous errors and accurately report the status of Plaintiffs’ second loan, finally.

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SCOTUS Protects Lawyers Seeking Non-Judicial Foreclosures

Editor’s Note: BCLP’s consumer financial services team is a group of specialized lawyers from around the U.S., adept in state court rumbles, courthouse steps foreclosures, and bankruptcy court interludes. They are also deep thinkers in consumer law, and were waiting for this ruling today. If you have a portfolio of consumer loans and want some efficient, value-maximizing handling, give us a call. Here’s the take from Zina Gabsi, from our Miami CFS practice.

Earlier today, the U.S. Supreme Court issued its long-awaited opinion on whether law firms pursing non-judicial foreclosures are “debt collectors” as defined by the Fair Debt Collection Practices Act (“FDCPA”), 15 U.S.C. §1692 et seq. Obduskey v. McCarthy & Holthus LLP, Case No. 17-1307 (March 20, 2019). In its ruling, the Court held that a business engaged in no more than a non-judicial foreclosure is not a debt collector under the FDCPA. (Business lawyers around the US breathed a collective sigh of relief.) Instead, the Court held that those pursuing non-judicial foreclosures are subject to the more limited FDCPA restrictions contained in section 1692f(6).

The FDCPA defines a debt collector as “any person … in any business the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect, directly or indirectly, debts owed or asserted to be owed or due another.” 15 U.S.C. §1692a(6). But the statute also includes the “limited-purpose definition” which states that “[f]or the purpose of section 1692f(6) [the] term [debt collector] also includes any person … in any business the principal purpose of which is the enforcement of security interests.” Thus, the statute creates a set (debt collectors) and a subset (people that only seek to enforce security interests). The subset certainly includes “repo men,” but according to the Supreme Court, the subset also includes lawyers pursuing non-judicial foreclosures. The subset is subject to far less restrictions and mandates under the FDCPA.

The Court considered three factors in coming to its conclusion: (i) the text of the FDCPA itself; (ii) Congress’s intent; and (iii) the FDCPA’s legislative history. The Court explained that but for the limited-purpose definition (the subset), those pursuing non-judicial foreclosure would in fact be debt collectors under the additional provisions of the FDCPA. However, the Court notes that a plain reading of the limited-purpose definition, “particularly the word ‘also,’ strongly suggests that one who does no more than enforce security interests does not fall within the scope of the general definition. Otherwise why add this sentence at all?” Obduskey, at page 8. To interpret the definition of a debt collector under the FDCPA otherwise would render the addition of the “limited-purpose definition” superfluous. Id., at page 9. Furthermore, the Court posited that Congress “may well have chosen to treat security-interest enforcement differently from ordinary debt collection in order to avoid conflicts with state nonjudicial foreclosure schemes.” Id.

Of note, the Court rejected Obduskey’s argument that “McCarthy engaged in more than security-interest enforcement by sending notices that many ordinary homeowner would understand as an attempt to collect a debt backed up by the threat of foreclosure.” Id., at page 13. The Court explained that such notices were likely required under state law in order to pursue the non-judicial foreclosure and therefore the FDCPA’s “(partial) exclusion of ‘the enforcement of security interests’ must also exclude the legal means required to do so.” Id.

Justice Sotomayor wrote a concurring opinion to make two observations: “First, this is a close case, and today’s opinion does not prevent Congress from clarifying this statute if we have gotten it wrong. Second, as the Court makes clear, ‘enforcing a security interest does not grant an actor blanket immunity from the’ mandates of the FDCPA.” She interestingly noted that Congress may not have contemplated the Court’s interpretation because even though States do regulate nonjudicial foreclosures, the FDCPA was enacted “to promote consistent State action to protect consumers against debt collection abuses.”

The holding sheds light (for the moment) on the scope of the limited-purpose exception to the FDCPA’s definition of a debt collector as it relates to nonjudicial foreclosures. “[W]hether those who judicially enforce mortgages fall within the scope of the primary definition is a question we can leave for another day.” Id., at page 12. We will cover that another day too!

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Georgia Supreme Court Weighs in on Director Liability

The Supreme Court of Georgia issued its latest opinion on March 13, 2019 in the continuing litigation over whether former directors and officers of the now defunct Buckhead Community Bank can be held liable for financial losses from commercial real estate loans.

The Georgia Supreme Court had previously advised a Georgia federal court, where the case was filed by the FDIC, that the directors and officers of the bank could be held liable if they were negligent in the process by which they carried out their duties. Following that opinion, rendered in 2014, the case returned to federal court, and a trial was ultimately held in 2016. In that trial, the jury concluded that some of the directors and officers were negligent in approving some loans and awarded the FDIC $4,986,993 in damages.

The trial judge in the case found that the defendants were “jointly and severally liable” for the award, meaning that the entire verdict could be collected from any one of the defendants. The defendants appealed contending that joint and several liability had been abolished by the General Assembly in 2005. The defendants also argued that the trial court should have given the jury the opportunity to apportion the damages among each of the defendants according to their respective degrees of fault. In considering the appeal, the United States Court of Appeals for the Eleventh Circuit again sought direction from the Supreme Court of Georgia on this new issue of law.

On Wednesday, in a 39-page opinion, the Georgia Supreme Court responded, providing answers to some, but not all, of the questions raised by the Eleventh Circuit. The Georgia Supreme Court held that joint and several liability can still be imposed in Georgia on defendants “who act in concert insofar as a claim of concerted action involves the narrow and traditional common-law doctrine of concerted action based on a legal theory of mutual agency and thus imputed fault.” The Supreme Court indicated that this was a very narrow exception to the usual rule that damages must apportioned among defendants.

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Lender’s Non-Liability for a Servicer’s RESPA Violation

In a first, a federal circuit court rules a lender cannot be held liable for a servicer’s RESPA violation.

A borrower who took out a home equity loan from Bank of America alleged the Bank is vicariously liable for the failure of its loan servicer to comply with the Real Estate Settlement Procedures Act (RESPA), particularly 12 C. F. R. § 1024.41(c)(1). That regulation imposes duties on servicers who receive a complete loss mitigation application more than 37 days before a foreclosure sale to–within 30 days of receipt–evaluate the borrower for all loss mitigation options available to the borrower and provide the borrower with a notice stating which options, if any, it will offer the borrower.

The Fifth Circuit, which is apparently the first circuit to address the issue, held banks cannot be held vicariously liable for the alleged RESPA violations of servicers. Christiana Trust v. Riddle, — F. 3d — (2018) (2018 WL 6715882, 12/21/18). The Court had three related reasons.

First, “[b]y its plain terms the regulation at issue here imposes duties only on servicers” as it states a “servicer shall.” 12 C. F. R. § 1024.41(c)(1)

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Statute of Limitations on Reverse Mortgages

In Hayes v. Reverse Mortgage Solutions, Inc., No. 3D17-1603 (Fla. 3d DCA Nov. 21, 2018), a case of first impression, the Florida Third District Court of Appeals considered whether the statute of limitations for enforcing reverse mortgage loans begins on the date the note matures or upon the death of the borrower.

Defendant contended that the foreclosure action, filed in 2014, was time-barred by the Florida statute of limitation because the cause of action accrued on the date the borrower died in 2008, or alternatively, upon the mortgagee’s acceleration of the reverse mortgage when a prior foreclosure action was filed in 2009. Finding that the language in the reverse mortgage at issue (“[l]ender may require immediate payment in full of all sums secured by this Security Instrument if: (i) A Borrower dies …”) confers upon the mortgagee the right, but not the obligation, to accelerate payment of the debt, the Court held acceleration of the debt based on the death of the borrower is optional and therefore does not automatically amount to accrual of the cause for purposes of the statute of limitations.

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11th Circuit Rejects Reverse Mortgage Foreclosure Statute-Based Defense

The Eleventh Circuit recently rejected a defense to foreclosure based on a federal statute governing insurance of reverse mortgages by the Department of Housing and Urban Development (“HUD”).

HUD administers a mortgage-insurance program designed to induce lenders to offer reverse mortgage loans to elderly homeowners.  If the loan meets certain conditions, HUD insures against any outstanding balance owed on the loan.  One condition, contained in 12 U.S.C. § 1715z-20(j), provides:

The Secretary may not insure a home equity conversion mortgage under this section unless such mortgage provides that the homeowner’s obligation to satisfy the loan obligation is deferred until the homeowner’s death, the sale of the home, or the occurrence of other events specified in regulations of the Secretary. For purposes of this subsection, the term “homeowner” includes the spouse of a homeowner.

Borrowers and their estates have argued the statute prevents lenders from seeking repayment of a loan subject to a reverse mortgage until either the sale of the home, or the death of both the borrower and his or her non-borrowing spouse – even if the loan documents provide to the contrary.   The Court in Estate of Caldwell Jones, Jr. v. Live Well Financial, Inc., No. 1:17-cv-03105-TWT (decided Sept. 5, 2018) rejected this argument.

In Estate of Caldwell Jones, Jr., former NBA star, Caldwell Jones, Jr., obtained a reverse mortgage secured by his home.  Jones lived in the home with his wife and his minor daughter, until he passed away in 2014.  Jones’s wife was not a co-borrower.

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Modifications on My Mind: When “Will” Means “Must” and a Conventional Hand Signature is Not Required

The Sixth Circuit has issued another opinion regarding loan modifications, following its opinion two weeks ago in Segrist v. Bank of New York Mellon (2018 WL 3773785, August 9, 2018), on which I earlier wrote.

Now, in Pittman v. Experian Information Solutions, Inc. — F.3d —- 2018 WL 4016604, August 23, 2018), the Sixth joins the First, Seventh, Ninth, and Tenth Circuits, in holding that loan servicers are contractually obligated under the terms of their Trial Modification Plan (“TPP”), pursuant to the Home Affordable Mortgage Program (“HAMP”), to offer a permanent modification to borrowers who comply with the TPP by submitting accurate documentation and making trial payments.

The Court relied on language in the TPP that said, “[a]fter all trial period payments are timely made and you have submitted all the required documents, your mortage will be permanently modified.” The court noted hornbook contract law that “the mere fact that an offer or agreement is subject to events not within the promisor’ control … will not render the agreement illusory.”

Additionally, the TPP was sufficiently definite to constitute an enforceable contract, even though it did not set the precise terms for the permanent modification, because HAMP guidelines provide the existing standard by which the ultimate terms of the permanent modification were to be set in order to bring down the monthly payments to 31% of gross income.

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